Outline:
1st
Historical introduction
2nd The
production function
3rd The
labour supply
4th The
labour productivity
5th The
labour hoarding
6th
Inflexibilities
7th
Environmental problems
8th Concluding
remarks
1th
Historical introduction
In this
chapter we will critically examine the assertion that full employment can only
be achieved if the growth rate of the domestic product exceeds a certain
critical mark. This assertion was made primarily following certain theoretical
and empirical work by Arthur M. Okun, which found its way into the economic
literature as Okun's Law.
The law
formulated by Okun states in fact that the unemployment rate is only reduced
from a critical growth rate onwards, the so-called employment threshold. If the
actual growth rate of the domestic product is below this threshold, it must
even be expected that the unemployment rate will rise.
Arthur
M. Okun was an American economist and Keynesian who lived from 1928 to 1980.
Among other things, he studied the causes of poverty and the mechanisms that
exist between domestic product and employment.
The law
named after him is based on empirical studies carried out by Okun for the USA
for the period 1954 to 1962, which showed the connection between the growth
rate of the domestic product and the unemployment rate that is claimed in
Okun's law.
In the
meantime, the connections between the growth rate and the unemployment rate
have been repeatedly tested empirically; these studies came to the conclusion
that although certain connections between the two variables could be
established, the critical threshold for the overturning of the unemployment
rate was at very different values in the countries studied. (See, for example,
the Wikipedia article on Okun's Law and the literature cited there).
Even
though Okun's Law has entered the literature, a number of economists, such as Rudiger Dornbusch and Stanley Fischer, have considerable
doubts as to whether one can really speak of a law here, since the empirical
connections exhibit a high degree of uncertainty. The values of the individual
parameters would fluctuate over the years and the relations were also partly
unstable. Moreover, the growth of production was only determined by estimates.
2nd The
production function
The
relations between production and employment are generally described in the
so-called production function and it is therefore natural to begin the critical
analysis of Okun's Law by asking how the relations between domestic product and
the unemployment rate should actually develop when taking this function as a
basis.
Here, we want to base our considerations on a
Cobb-Douglas production function for the domestic product, which has also been
subjected to a repeated empirical test. According to this, the production
function can be described as follows:
X: real
domestic product b: growth factor A: labour input K: capital input
α:
production elasticity related to the factor labour.
According
to this, there is a certain level of real domestic product (X) at which full
employment is given, i.e. a level of employment (A') is reached at which
employment corresponds to a previously defined level of employment. If the
domestic product is lower than this critical level in the initial period, then
unemployment prevails and it requires an increase in demand and therefore also
in production to reduce the unemployment rate. However, once a level of
domestic product has been reached at which full employment has been achieved,
then ceteris paribus full employment is likely to persist in subsequent periods
if this domestic product remains constant.
Note,
however, the following two limitations. We have derived this relationship under
the ceteris paribus formula. This means that the domestic product depends on a
large number of unspecified conditions and only if all other variables remain
constant and only the level of employment varies, this established relationship
between domestic product and employment will be valid. In this case, the
reverse is also true, of course, that the domestic product may very well remain
constant after reaching a level of full employment and that unemployment
nevertheless rises.
However,
then this is not already evidence for the validity of Okun's law. Nor is it
proof that unemployment has risen due the growth rate of the domestic product
that has remained below the critical employment threshold. It must be clarified
at first on which other variables the domestic product and the employment rate
depend and whether one of these variables could not simply have changed and for
these reasons the unemployment rate rose. For example, during the two oil
crises in the mid-1970s and the early 1980s, the price of oil rose
dramatically, which in turn triggered a setback in economic activity and mass
unemployment.
In the
discussion of the production function, it is important to bear in mind in the
second place that this is an equilibrium theory. It is not claimed that at any
moment this connection formulated in the Cobb-Douglas function can be
established, but only that the values of domestic product and employment on
equilibrium move towards this relationship. How fast this equilibrium tendency
is approached and whether this equilibrium tendency is reached in a straight
line or in cyclical oscillations, is not stated in this theory at all.
Therefore, it does not contradict the theory described in the Cobb-Douglas
functions at all if the unemployment rate initially rises or falls under
certain circumstances despite a constant domestic product.
In the
following we want to deal with these 'cetera' in more detail and clarify to
what extent simply a change in these additional variables has triggered the
empirically established connections (in Okun's law) without actually being able
to blame the missing growth rate for unemployment.
3rd The
labour supply
We start
our considerations with the changes in labour supply. So far, we have tacitly assumed
that there is a mirror-image relationship between employment and the number of
unemployed: whenever employment increases, the number of unemployed decreases
by the same amount, and whenever employment decreases, the number of unemployed
again increases by the same amount. However, this assumption only applies to
the case where the supply of labour remains unchanged. However, we have to
expect the possibility that the number of workers increases (or decreases). In
this case, even if employment remains constant, the number of unemployed
increases (decreases).
There
are several reasons why the supply of labour may change. Firstly, due to an
increase in the birth rate about 18 years ago, the number of people entering the
labour force may increase more than the number of workers partially decreases
at the same time due to retirement. Secondly, it is conceivable that because
the average life span has risen sharply, many workers leave the labour force
later. In this case, the number of unemployed would increase if the number of
people entering the labour force did not decrease at the same time, or if
employment increased, always assuming that the demand for labour remains
unaffected by these developments.
Migration
can also change the number of available workers. A reduction in the labour
force potential occurs, for example, when more workers of employable age
emigrate than immigrate.
If we
only pay attention to the official statistics, even changed definitions of
employment or unemployment can already lead to a nominal change in the reported
unemployment rate. For example, it is conceivable that within the framework of
the official statistics, workers who have passed the age of 60 and are
considered as no longer employable are no longer listed in the statistics as
unemployed, although in this example nothing has changed in the real situation
of the workers concerned.
However,
we must add that an increase in the domestic product caused solely by the
increase in the working-age population has nothing to do with the usual concept
of growth. One usually distinguishes between extensive and intensive growth.
One speaks of extensive growth when the increase in domestic product was caused
solely by an increase in the number of people employed; intensive growth, on
the other hand, only occurs when per capita income or perhaps also labour
productivity has risen. When one speaks of growth in economic theory, one
generally thinks of an increase in per capita income, i.e. of intensive growth.
The concept of growth is therefore used here as an indicator of an increase in
welfare.
4th The
labour productivity
Furthermore,
the relationships between domestic product (the output of the production
function) and employment (one of the input factors) only ever apply under a
given technology. In the Cobb-Douglas function, these technical specifications
are described by the b-parameter and the α-parameter. The b-parameter here
refers to situations where all input factors are varied equally, while the
α-parameter informs on the extent to which factor intensity affects the
productivity of a single factor of production.
The
indication that a change in labour productivity also has an influence on
employment does not bring any new insights, since labour productivity is
directly dependent on the technical parameters of the respective production
function. Of course, it is true that an increase in labour productivity
automatically leads to unemployment if the domestic product and the labour
supply are kept constant. However, this statement would only provide us with
new information if we could prove that productivity increases would always, or
at least usually, occur without an expansion of the quantity of products; but
this is precisely not the case. Technical progress does not fall like manna
from heaven, but is almost always the result of investments, which in turn
almost always increase production capacity.
We do
distinguish between expansion investments and rationalisation investments, and
in this respect the emphasis in the case of rationalisation investment is
primarily on increasing productivity, whereas in the case of an expansion
investment the focus is on expanding production capacity. Nevertheless, in
reality almost all investments bring about some improvement in productivity,
just as almost all investments are only profitable if the output is increased
at the same time. In this respect, we must always reckon with the fact that
productivity increases are the result of investments and that these investments
usually have a positive income effect.
In
general, the technical parameters in the production function depend on
technical progress, and a distinction is made between neutral, labour-saving
and capital-saving progress. J. R. Hicks speaks of neutral progress here when
the factor intensity remains constant while the interest-wage ratio remains
constant. Labour-saving progress, on the other hand, is present when the labour
intensity decreases while the interest-wage ratio remains constant, i.e. there
are fewer labour units per unit of capital. Finally, we speak of capital-saving
progress when capital intensity decreases while the interest-wage ratio remains
constant.
An
increase in unemployment is therefore to be expected if there is labour-saving
progress and if the savings in labour per unit of goods are not compensated by
the fact that, due to the increase in investment, demand also increases and
with it the supply of goods as well as the demand for labour derived from this.
Which
technical progress the entrepreneurs finally choose depends in turn on the
prevailing wage-interest ratio. In general, there is always a certain
wage-interest ratio at which full employment can be achieved. The emergence of
unemployment then depends decisively on a wrong interest-wage ratio, which
impedes the full utilisation of all scarce factors of production.
In
summary, one can say that if labour is saved per produced unit of goods due to
labour-saving technical progress, these savings can always be compensated by a
corresponding increase in the production of goods, so that, in fact, from a
certain growth rate onwards, large-scale unemployment can be prevented ceteris
paribus. However, it can by no means be concluded from these considerations
that unemployment can be reduced and ultimately eliminated only from a
very specific growth rate onwards. Pushing economic growth is at best only one
way to reduce unemployment, but as we will see below, it is not even the most
advisable method.
5th The labour hoarding
Let us
now turn to the question of whether Okun's Law is perhaps simply a consequence
of 'labour hoarding' on the part of enterprises. By 'labour hoarding' we
understand the fact that in times of economic downturn, enterprises do not lay
off employees who are no longer needed for production, but continue to employ
them.
Two
facts are responsible for such behaviour. Firstly, it is worthwhile for
enterprises not to lay off skilled workers during the recession. It is true
that this results in costs that are not necessary as such, since wages and
employers' social security contributions must continue to be paid, even though
these workers cannot be used productively during this time.
However, if enterprises were to lay off their
skilled workers at the onset of the recession, they would have to incur
additional costs to recruit and train them during the next upswing, and these
costs may be so high that they are still higher than the wage costs of keeping
these skilled workers employed. This is especially true because in the first
few years of employing a newly hired skilled worker, an enterprise incurs
higher costs than the revenue gains from employing these employees. The hiring
and training of a skilled worker represents an investment that only pays off
for the enterprise after a few years.
Secondly,
rigorous employment protection can also contribute to enterprises not laying
off workers in times of recession. We speak of rigorous employment protection
when these provisions do not allow dismissals even when workers are not needed
at all for production due to a decline in sales. In such a case, an enterprise
is faced with the alternative of not being able to dismiss workers because of
the protection against dismissal, even though they are not needed for production
and therefore have to incur additional wage costs, or else not being able to
dismiss workers at all in times of recession. Here too, of course, almost all
workers incur additional recruitment and training costs when they are hired, so
that continuing to employ workers is still the more cost-effective alternative.
Now, if
there is rigorous protection against dismissal, an entrepreneur will only hire
new workers at the beginning of the upswing if he can count on the fact that
the economic upswing has already begun. We have to be clear that from the
perspective of an enterprise it is not clear at the end of a recession whether
new orders are of a one-off nature or whether they initiate the reversal in the
economic trend and thus the upswing.
In such
a situation, an enterprise will try to carry out additional orders with
overtime of the already employed workforce and may even renounce the order
entirely if such a strategy is not possible.
Such a
situation then leads to the economic upswing being delayed and starting later
than if there were no such rigorous protection against dismissal. In any case,
labour hoarding contributes to the labour market lagging behind the cyclical
development of the goods markets.
One
might now be tempted to see in this phenomenon a confirmation and justification
of Okun's Law. In fact, in this case a small upswing, i.e. a low growth rate,
is not sufficient to hire new workers and thus reduce the unemployment rate.
Only when the recovery is in full swing, i.e. the growth rate has exceeded a
critical level, do enterprises begin to hire new workers.
A closer
look at these correlations shows, however, that Okun's Law cannot be explained
by the fact of the labour hoarding alone. After all, as soon as enterprises
have started hiring new workers, there is no longer any reason why the growth
rate must continue in the future in order to prevent the number of unemployed
from rising again. Even if the domestic product remained constant in future
periods, i.e. the growth rate became zero and would in any case lay below the
critical employment threshold, there would be no reason, without further
additional conditions, why the achieved employment could not be maintained.
According to traditional understanding, lay-offs would only be feared again if
the economy collapsed anew.
Basically,
rigorous dismissal legislation only has the effect of postponing the extent of
unemployment. Without this protection against dismissal, entrepreneurs would
have laid off more workers in total when the economy declined. Thus, even at
the beginning of a new economic upswing, the unemployment rate would have been
higher. Although the willingness of entrepreneurs to immediately hire more
workers at the beginning of the upswing would have been greater overall without
protection against dismissal, the unemployment rate would nevertheless not have
been lower, since the hiring of new workers would have been based on a higher
level of unemployment.
In the long run, however, rigorous protection
against dismissal actually causes a reduction in the level of employment, since
in the initial phase of the economic upswing entrepreneurs sometimes refrain
from taking on individual orders and wait to see if there are already signs of
a sustained upswing. In some cases, entrepreneurs do accept these orders, but
try to fill them not by hiring new workers, but by encouraging the existing
workforce to work overtime. In this case, employment increases in terms of
hours worked. Nevertheless, unemployment is not reduced in this case, since the
number of jobs is not increased.
6th
Inflexibilities
According
to the traditional understanding, macroeconomic unemployment is primarily
explained by the fact that markets no longer react to changes in data - as
assumed in neoclassical theory. The starting point is the theorem formulated by
Jean Baptiste Say, according to which increases in the supply of goods create
their own demand, so that macroeconomic unemployment cannot be explained by a
lack of demand for goods, which was claimed by the proponents of the
underconsumption theory (e.g. Robert Malthus). The entire sales proceeds would
become income, either as remuneration for labour or for the use of other
factors of production, or the remainder as profit income for the entrepreneurs.
The entire income would continue to become demand; either as demand for
consumer goods or it would be reserved for saving purposes, which, however,
would lead to an increase in demand for capital goods. The value of total
demand would therefore be exactly equal to the value of supply.
Now Say
also assumed that the investment volume just corresponded to the savings sum,
since it is the entrepreneurs themselves who build up savings precisely when
and only when they need them for investments in their own enterprise. The danger
that too much is saved does not exist, since saver and investor coincide in the
person of the investing enterprise.
This
assumption was certainly correct in Say's time. In the meantime, however, the
income of employees also increased to such an extent that they were also able
to save parts of their income. At the same time, the size of the enterprise
grew with the consequence that the capital requirements could no longer be
covered by the entrepreneur's own savings alone. This led to the emergence of corporations,
which obtained capital on the capital market, whereby part of the savings
offered on the capital market came from non-entrepreneurial households.
Although,
in the course of the further development of our economies, savings and the demand
for credit no longer coincided in the same person, i.e. they originated from
different economic units, and although it could therefore no longer be
automatically assumed that the savings sum and the investment sum were
identical, the neo-classics, according to Say, still assumed that the market
automatically ensured a balance between savings and investment. If a larger
savings sum was offered than the demand for loans for investments, the interest
rate would fall, the willingness to save would therefore decrease and at the
same time the demand for loans would increase, since with lower interest rates
more investment objects would become profitable.
Conversely,
it applied that if the supply of savings was too low, the interest rate would
automatically increase and that in this way savings would increase, but the
demand for investment would decrease. Thus, if the capital markets function,
the interest rate mechanism automatically ensured that the savings sum in
equilibrium corresponded to the investment demand and thus that Say's theorem
still applied.
This is
where John Maynard Keynes' criticism of Say's theorem comes in. On the one
hand, it must be assumed that not all savings are offered on the capital
market, but that part of the savings is hoarded, i.e. it is not invested in a
way that earns interest, and would therefore seep away. This is especially true
when the economy is at its lowest point. The interest rate has fallen so much
in the immediate past that interest rate increases are expected in the near
future. However, interest rate increases mean price losses for fixed-interest
securities. In such a situation, it becomes profitable for households not to
invest their savings on the capital market. Although they then forego an
interest gain, which is low anyway when interest rates are low, they also do
not have to fear that they will buy securities of which the price will fall in
the near future and that price losses will therefore be incurred when they sell
the securities. These price losses may very well be higher than the possible
interest income, so that hoarding appears to be quite profitable in these
times.
On the
other hand, interest rate cuts are not sufficient to induce enterprises to
invest more. In times of economic downturn, production capacities are not
utilised anyway and therefore enterprises have no reason to invest and thus
expand production capacity. Thus, in times of recession, the interest rate
mechanism fails. The market no longer ensures on its own that interest rate
cuts increase the demand for investment and with it the total demand for goods
and that in this way unemployment is prevented.
Now,
according to the classical view, the interest rate mechanism is not the only
market mechanism that ensures equilibrium on the labour markets. According to
the classical view, a balance between the supply of labour and the demand for
labour primarily takes place on the labour market itself. If the demand for
labour is too low to employ all workers who are able and willing to work, the wage
rate on a free labour market falls and with it the demand for labour rises, so
that on a free and functioning labour market unemployment is reduced by itself.
Also in
this issue, Keynes started from the assumption that the wage mechanism does not
lead to a reduction in unemployment. Firstly, the wage rate would be
predetermined anyway due to the collective agreements and therefore were fixed
downwards. But even then, if we could assume downward wage flexibility as
given, wage variation would have no effect on employment. The level of goods
production and employment derived from it would be determined solely by the
autonomous investment demand and the consumption function. The position of the
consumption function, however, is not influenced by wage changes. A wage
variation merely represents a movement along the given consumption function.
However, an influence on production and employment can only be expected if the
consumption function as such would also be shifted. This is only the case,
however, if more would be consumed while income remains the same.
Keynes
concluded from this analysis that full employment could only be achieved by the
state having to compensate for the insufficient private demand for goods by
increasing state expenditure, whereby this policy would only be successful if
the additional state expenditure were financed in deficit. If the state wanted
to finance the additional government spending by raising tax rates, nothing
would be gained, since in this case private demand would be curbed even further
and government demand would only take the place of this private demand.
Now, the
discussion on Keynesian theory has shown that the market by no means fails
always when it comes to reducing unemployment. It has been pointed out, for
example, that besides expansion investments there are also rationalisation
investments. And that enterprises will strive to improve their sales
opportunities by rationalisation investments especially in times of decline in
sales. The thesis that investment demand would not react to interest rate cuts
in times of recession only applies to expansion investments. The demand for
investment will nevertheless increase in downturn phases when interest rates
are lowered, because it is precisely in these times that rationalisation is
necessary.
At this
point, however, we want to limit ourselves to another criticism of the Keynes
doctrine. The Keynesian approach can also be criticised inasmuch as a budget
deficit is by no means the only possible strategy to overcome mass unemployment.
Instead of the state pursuing a deficit-oriented fiscal policy, one could also
try to reduce unemployment by increasing the flexibility of the markets by
political means.
It is
indeed conceded here that in the current situation the markets are not in a
position to bring about full employment by themselves. However, the actual
cause for this deficiency is not seen in natural systemic deficits, but in the
fact that this inflexibility was caused in the first place by a multitude of
mainly socio-politically motivated measures.
In this
way, the previous approach to avoiding mass unemployment becomes extremely
questionable. In a first step, the adaptability of the markets is reduced in
order to increase the social compatibility of the markets. However, one accepts
here that precisely because of the reduction of the adaptability of the
markets, another social policy goal is violated. If there is a lack of
adaptability on the labour markets, this lack is reflected in unemployment.
Therefore, further political measures are needed to reduce the unemployment
that has arisen as a result of previous social policy.
But this
policy also leads once again to the neglect of social goals. Thus, a state
deficit policy can burden future generations if the state uses the deficit
revenues for consumptive purposes.
Much
would be gained already if in future, whenever social policy goals are to be
realised, it was to be examined whether these goals could not also be achieved
in ways without further reducing the adaptability of the markets. We can assume
that in general several alternative measures are available for discussion for a
political goal, which differ, among other things, in the extent to which the
adaptability of the markets is impaired.
This
question must also be asked for the measures that have already been
implemented. We have to assume here that the adaptability of markets is
determined by three determinants: Price flexibility, i.e. the question of how
strong and how fast price variations become possible when imbalances occur on
the markets; the elasticity of supply and demand, i.e. the question of how fast
and how strong price variations trigger a change in demand or supply, whereby
these reactions must proceed normally, thus e.g. a price increase must trigger
a reduction in demand and an expansion of supply.
A third
prerequisite is needed to avoid prolonged unemployment. We have to assume that
in each period data changes occur which cause new imbalances and, on the other hand,
market forces are at work which in turn reduce existing imbalances. Only when
the forces that create equilibrium and the forces that reduce equilibrium are
in balance, then it can be prevented that the market imbalance is not increased
even further. But even here, unemployment can occur on a larger scale, namely
if the market was not able to clear the markets completely in the previous
period.
If this
was not possible in the prior period, the current period begins with a certain
magnitude of initial imbalance. Here it is not sufficient that the
equilibrium-triggering and equilibrium-reducing forces are of equal magnitude;
the initial imbalance can only be reduced if the imbalance-reducing forces
predominate.
Now,
imbalances arise through data changes. For the most part, these are entirely
desirable; an increase in welfare occurs precisely by way of data changes.
Either welfare is increasing because technical progress occurs, or because
consumers are able to align their demand with their needs, or the data change
consists of improving the economic order, e.g. by preventing disincentives or
creating incentives to make production more efficient or fairer.
It is
therefore certainly not desirable that data changes are prevented and that in
this way the extent of data changes and thus also of imbalances is reduced.
However, it is possible and desirable that the type of data changes is changed
in such a way that the extent of the imbalances is reduced.
A decisive advantage of a market economy over a
state planned economy is that economic decisions are made in an atomised
manner, i.e. there are a large number of independent households and enterprises
which react to changes in data at different times and in different ways. If,
for example, the price of a security falls, the market participants may react
differently to this change. Some fear that this price drop will propagate in
the following periods, so they will sell their securities to avoid future
losses due to further price drops. Other market participants assume that
today's price drop was triggered purely by chance and that there is no real
change in the economic data behind this price change, so they will even buy
additional securities of this type, hoping to sell them at a price gain in
future periods. Above all, the time lag that occurs from the data change to the
reaction to this data change is different for different people.
Whereas
a data change decreed by the state (e.g. a law) comes into effect on a very
specific date and also triggers similar reactions among all affected market
participants, it can be assumed in the case of a market economy regulation that
some of the reactions cancel each other out, since they are directed in
opposite directions and, above all, that the measures with the same direction
do not occur at the same time, but occur distributed over time.
Already
this stretching means that market forces are more effective. They are similar
to a sewerage system that is designed to channel rainwater into the sewers in
the municipalities. No matter how good a broadly designed sewer system is, it
is overwhelmed in the event of a cloudburst, so that in these cases the water
in the streets is not drained away. If the same amount of water had emerged
distributed in time and space, the system would have been sufficient to drain
the water immediately into the sewage system.
In a
similar way, the existing equilibrium forces of the market would be much better
able to reduce imbalances quickly if the data changes encountered a large
number of decision-makers, if this caused some of the reactions to be
oppositely directed, thereby causing much less imbalance, and especially if the
reactions to the data change were spread out over time.
Now, it
can be assumed that in a market economy there are always more independent
decision-makers than in a state-planned economy. Nevertheless, these advantages
of a market economy are reduced and cancelled out if only a small group of
corporations have to make decisions. Here, a successful regulatory policy that
prevents the emergence of monopolies can contribute to the existing and desired
data changes causing fewer market imbalances or reducing them more quickly.
The legislation could also be changed in such a
way that the enforcement of these laws is deliberately prolonged, i.e. that the
enterprises are granted longer periods for the enforcement of these laws, so
that it can be expected that the reactions and actions of the market partners
will be spread out over time.
7th
Environmental problems
The
thesis that we can only solve the problem of unemployment with high economic
growth is questionable from an ecological point of view. If it were correct, we
would be condemned to permanent growth in order to guarantee full employment.
However, this is exactly what is not possible at all in the very long term. We
have to assume that a large part of natural resources is limited, that natural
resources are consumed in production and that they cannot necessarily be
replaced in every case.
This may
be least true for energy resources. The traditional fossil energy resources
(coal, wood, oil, gas) are limited and they are consumed in production, but new
energy sources can be obtained, especially solar energy, natural gas and wind
energy; in the very long term, solar energy in particular will be available for
billions of years.
Nevertheless,
significant bottlenecks can arise for a limited period of time if it is not
possible to develop the technology for the mass exploitation of solar energy in
time and to expand the long-distance power grid in such a way that solar energy
and energy generated from wind power can also be brought to the places of
consumption. We have to assume here that both solar energy and energy from wind
power are not produced at the places of consumption, so that it will be
necessary to transport electricity to the most distant places of consumption
via long-distance grids.
The
traditional electricity generation plants (nuclear power plants as well as coal
and gas plants), on the other hand, were almost always able to produce in the
areas where the electricity was also in demand. Furthermore, there is a need to
expand the storage plants. While the traditional power plants were able to
produce electricity evenly at all times of the year, electricity from solar and
wind energy cannot be produced at all times. There are times when there is no
wind and when the sky is covered in clouds and therefore, in this case,
electricity production must be greatly reduced.
Furthermore,
raw materials can partly be replaced by plastics and certain raw materials that
are not finally consumed in production and consumption can be recovered through
recycling. Overall, however, the availability of raw materials is limited and
therefore limits growth opportunities.
Also,
space as such is a scarce commodity and cannot be increased arbitrarily. Of
course, the earth is still a long way from reaching the population density of a
large city. Nevertheless, there are also spatial limits from an ecological
point of view, as the sealing of the soil impedes the water balance and other
natural processes.
It is a
frightening thesis that full employment is supposed to be possible only with
permanent growth. But also, for reasons of justice, one will hardly be able to
deny today's developing countries to strive for a similarly high level of
development as that achieved by today's already highly developed industrial
nations. In view of the scarcity of natural resources, there is hardly any room
here for sustained real growth also in the industrialised nations.
Finally, the development of demand in itself,
namely the demand that does not have to be artificially awakened through
advertising, should determine whether and to what extent growth is needed and
desired.
8th
Concluding remarks
At the
beginning of this article, I pointed out that some theorists doubt whether one
can actually speak of a regularity in the situations described in Okun's Law. I
would like to join this criticism and also justify it a little further.
Hans
Albert had criticised long ago a part of the neoclassical theorists and accused
them of being addicted to model platonism. These
scientists would derive hypotheses in pure models of thought by logical
conclusions alone, which they already regarded as valid theories. In reality,
however, these theorems did not contain any new, informative statements, they
were pure empty formulas, logical derivations that resulted exclusively from
the assumptions and in this respect also did not show more knowledge than was
already assumed in the assumptions.
Also,
these assumptions would be relegated to the data wreath, which was not to be
questioned further by economists. In response to the statement of the theory of
marginal productivity, that the wage rate corresponds to the marginal product
of labour, which has already been refuted by empirical evidence, these
neoclassical scientists would reply that they had not even claimed at all that
the wage rate actually corresponded to the marginal product of labour, but
rather that this theory was limited to the fact that under certain assumptions
(profit maximisation, quantity adjustment and declining marginal returns) the
wage rate necessarily corresponded to the marginal product of labour.
It is of
course very unsatisfactory if all empirically relevant economic questions are
classified as data variables and are thus basically to be answered by
non-economic sciences, which in turn have set themselves completely different
tasks than the problems that are to be solved within the framework of economic
science. Much more efficient is a division of tasks between the individual
fields of science, in which the questions raised in the context are also
clarified by the part of science that investigates these questions.
One can
certainly agree with this criticism; it is clear that every theoretical
statement must be empirically tested before it is presented as scientific
knowledge. Also, most of the models of thought developed within the framework
of neoclassical theory can very well be reformulated into empirically valid,
i.e. falsifiable hypotheses that then also stand up to empirical testing.
In a
similar way, however, criticism can also be directed against some of the
empiricists who pretend that useful theories can be developed from empirical
investigations alone. Empiricism needs theory just as much as theory can only
be confirmed by empirical studies.
Thus, it
is quite possible that for a certain time and for a certain economic sector it
is shown that there is a high correlation between two variables (e.g. growth
rate and unemployment rate). Nevertheless, it cannot already be clearly
concluded from these results that there is a causal connection between these
two variables, i.e. that when one variable reaches a higher value, the other
variable also changes in a very specific way. It would be conceivable that both
variables are completely independent of each other, but that they are both
directly dependent on a third variable that is not known in detail and therefore
not shown, whereby this variable, for more coincidental reasons, has only
occurred in this time and in this area, but will not necessarily be found at
all times and in all economic sectors.
The
statement of Okun's Law, according to which the unemployment rate can only be
reduced if the growth rate of the domestic product is above a critical
threshold, may well be true if certain other conditions are met. However, this
critical growth rate is neither a necessary nor a sufficient condition for reducing
the unemployment rate.
A
certain growth rate is not necessary for a reduction in the unemployment
rate, since even with a constant domestic product, imbalances in general and the
number of unemployed in the specific sense can be reduced simply due to an
increased flexibilisation of the markets.
A certain growth rate is not even a sufficient
condition to reduce unemployment. It is conceivable, for example, that the
economic upswing is due to labour-saving technical progress, in which the
redundancy effect more than compensates for the income effect. In this case,
labour-saving technical progress means that fewer workers are needed per unit
of output (redundancy effect). However, since technical progress requires
investment, the demand for goods and thus indirectly also the induced demand
for labour is partially increased (income effect), whereby it is quite possible
that this upswing is not sufficient to fully reintegrate the labour released
due to rationalisation into the production process. In fact, the unemployment
rate may even rise precisely due to a high growth rate.